Chart of the day: Aussie – Yen cross

| 27 October 2008 11:00

Of the major currencies, the Japanese Yen has been the strongest in the last few months, while the Australian Dollar has been the weakest. These two currencies have also been the most conspicuous in the Japanese carry trade. That trade is now coming unstuck, precipitating changes of epic proportions.

For those of you who don’t know what the carry trade is, it is essentially a debt/asset position whereby one borrows money at low interest rates and invests that money in higher yielding assets (often with significant leverage). In Japan, after the stock market imploded and interest rates were cut to near zero, the carry trade took on monumental proportions amongst retail investors. See Yves Smith’s tale about this phenomenon from last year.

With an enormous gap between Australian interest rates and Japanese interest rates, buying Australian Dollars and selling Japanese was a particularly good trade for a very long time. However, those days are well and truly over.

The chart below should give one pause as to whether the trade was ever really worth it in the first place. The violent move out of the carry trade has left many with enormous losses.

In the end, it demonstrates the unintended consequences of easy money policies.

avatar About Edward Harrison

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages, a skill he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.

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